The recently-enacted federal government spending law established a select congressional committee to craft a federal response to the escalating crisis of multiemployer pension underfunding. The committee has its work cut out for it with a particularly thorny policy challenge. The failure of too many multiemployer plan trustees to fund their pension promises adequately threatens both the retirement income security of millions of workers and the solvency of the nation’s pension insurance system. In previous columns I explained the basics of the problem as well as the potential threat to U.S. taxpayers. In this column I will offer suggested dos and don’ts for the committee as it goes about its difficult work.
First, a quick recap: underfunding of U.S. multiemployer pension plans has reached roughly half a trillion dollars.
We have a national system for insuring these pensions operated by the Pension Benefit Guaranty Corporation (PBGC), but current projections are such that it will not be able to handle the strain. Although PBGC is only obligated to backstop a portion of these pensions’ benefit promises, even those obligations are estimated to put PBGC $65 billion in the red and to precipitate insurance program insolvency by 2025.
The causes of the crisis are various and complex, but they essentially boil down to this: lax pension valuation and funding rules have long permitted multiemployer plan trustees to promise pension benefits far beyond what they can pay. At the same time, PBGC is not permitted to assess premiums on plan sponsors that are sufficient to finance the insurance coverage it provides. Many multiemployer plans also face worsening demographics, meaning that the proportion of their participants already collecting retirement benefits is significantly higher than it once was.
Legislators have a difficult tightrope to walk. No clear way exists to effectuate swiftly the one truly equitable solution – namely, that pension plan sponsors should honor and fund all benefits they have promised to workers. The funding contributions necessary to accomplish this going forward have reached such high levels that if lawmakers mandate them in the near term, employers will simply pull out of the pension business, precipitating an even more immediate crisis in the pension insurance system.
That is the bad news. The good news is that a similar crisis loomed in the single-employer (SE) pension system just over a decade ago, and was largely pre-empted by prudent and underappreciated legislation: namely, the 2006 Pension Protection Act (PPA). Many of the key players responsible for this success story, including then-president George W. Bush and then-House majority leader John Boehner, are no longer in government. However, others, such as Senator Mike Enzi – then chairman of the Senate HELP committee and now chairman of its budget committee, can still bring the benefit of this experience to the current task.
Before the PPA, it was actually PBGC’s SE pension insurance program that faced the larger shortfall – nearly $23 billion in 2005. Those PPA reforms were a rare instance of lawmakers acting prudently to stave off a crisis, and the reforms occurred just in time. The insurance fund’s condition improved somewhat after the PPA, and then the Great Recession hit. Thanks in part to the PPA, SE plans were able to weather the storm. With financial markets having since recovered, the SE pension insurance shortfall is now less than half of what it was 12 years ago.
How did lawmakers do it? It was not easy; they had to walk a fine line of requiring employer sponsors to make gradual progress toward meeting their pension funding responsibilities without precipitating a rush to the exits. Lawmakers had to resist demands from the business community for more funding relief up front on the way to tighter long-term funding targets, while still providing them enough near-term flexibility to keep most sponsors in the game. While there has been some backsliding on the PPA reforms in recent years, for the most part they have served their intended purpose. SE pensions would be in still better shape today had there not been a few subsequent instances of legislated funding relaxation.
Unfortunately, multiemployer pension funding was left mostly unrepaired by the 2006 reforms, with costly consequences. Legislation in 2014 moved in the right direction by allowing multiemployer pension benefit reductions in the context of a solvency plan, but left the system’s core structural problems uncorrected. Experience suggests the following dos and don’ts for the select committee as it takes on the multiemployer pension funding crisis.
Dos:
Do measure plan liabilities and assets as accurately as possible: This means discounting future liabilities using appropriate (e.g. high-quality corporate bond) rates, and recognizing the true market value of plan assets. One of the precipitating causes of the current crisis is that multiemployer plans have not been required to measure accurately in the manner of SE plans. While plan sponsors sometimes object that market valuation of liabilities (and assets) will cause volatility in annual contribution requirements, volatility is best limited via the funding rules, not by misreporting liabilities and asset values.
Do apply a variable-rate premium for underfunded plans: President Trump’s budget includes a proposal to do this, and it makes sense. Underfunded plans pose a greater risk to the insurance system and they should pay higher premiums to reflect that risk. This is only fair to those sponsors who have responsibly funded their plans. The SE insurance program already has such a variable-rate premium and the multiemployer program would benefit from one as well.
Do restrict benefit increases, accruals and lump sum payouts in badly underfunded plans: While assessing higher premiums and funding requirements poses the risk of employer withdrawals, legislators can nevertheless act to stanch the bleeding from severely-underfunded plans. Whenever SE plans become badly underfunded a set of statutory limitations on unfunded benefit accruals kicks in. Multiemployer plans are subject to some such limitations, but they should be strengthened.
Do close loopholes undercutting funding requirements and withdrawal penalties. Multiemployer plan sponsors are supposed to pay a penalty reflecting their share of unfunded liabilities if they withdraw from a plan, but sponsors can escape these payments in many ways. Similarly, various loopholes exist that permit funding shortfalls in badly underfunded plans to worsen. No badly-underfunded plan sponsor should be permitted to avoid contributing the minimum annual amount required to prevent worsening underfunding.
Do authorize the PBGC to take corrective actions where plan trustees do not. In the SE world, the PBGC can initiate an “involuntary termination” if it finds that inaction would cause the loss to the pension system would increase “unreasonably.” Sometimes just the threat of an involuntary termination can precipitate a negotiation for a plan to reform its benefit and funding structure.
Don’ts:
Don’t use taxpayer funds to bail out private pensions. Using taxpayer funds would be unfair on its face, as most taxpayers are not even eligible to receive benefits from such plans. It also threatens to be ruinously expensive (per the previously-mentioned half-trillion dollars of underfunding). Further, it would destroy the foundational principle of the PBGC insurance system, a core purpose of which is to keep the financing of private pensions totally separate from public funds.
Even the hint of a potential taxpayer-funded pension bailout is enormously damaging. It signals to responsible funders of their pension promises that they will be disadvantaged relative to competitors who fail to fund theirs but who will be bailed out anyway. The mere suggestion that a taxpayer-financed bailout might be in the offing will itself depress pension funding; lawmakers should categorically rule out that possibility as soon as they can.
Don’t assume responsibility from sponsors for the broader pension problem. Given the massive underfunding in the multiemployer pension world, government must not pursue the quixotic ambition of single-handedly righting private pension finances. The federal government’s more achievable task is simply to shore up the PBGC insurance program so that it remains solvent and can cover such pension plans as need financial assistance. That will be hard enough without expanding the scope to cover sponsors’ benefit promises that exceed PBGC’s current guarantees.
Don’t procrastinate by providing loans to plans moving inexorably toward insolvency. Unless and until pension funding is put on a sustainable footing, loans will only allow the problem to grow worse and increase the cost of an eventual meltdown. If the problem could be solved by loaning money to plans and having them invest their way out of their holes, that would already have been accomplished when the stock market recently hit historic highs. There is no magic bullet by which these plans can borrow money, invest the proceeds, and emerge healthily without making fundamental changes.
Don’t allow underfunded plans to increase benefit obligations: If a plan is underfunded, benefit increases should stop. If a plan is severely underfunded, benefit accruals should be frozen.
A responsible solution to the multiemployer pension problem would reform valuation of plan assets and liabilities, it would both require and enable plans to progress towards adequate funding, close problematic loopholes, stabilize the pension insurance system and protect taxpayers against loss. We all have a stake in hoping the committee is up to this challenging task.
Charles Blahous, a contributor to E21, holds the J. Fish and Lillian F. Smith Chair at the Mercatus Center and is a visiting fellow at the Hoover Institution. He recently served as a public trustee for Social Security and Medicare.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, E21 delivers a short email that includes E21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the E21 Morning Ebrief.